The rise of financial technology ‘disruptors’ is “one of the unintended consequences of post GFC regulation and monetary policy”, according to a new Nikko Asset Management paper.
Authored by Singapore-based Nikko senior equity analyst, Peter Monson, the paper argues the burgeoning fintech sector has been buoyed “all-time low interest rates and intense regulatory pressure resulting in significant cost and capital burdens” hitting traditional financial players.
As well, the study highlights the growing influence of the ‘millennials’ as digital consumers.
“Internet companies carry strong brand names amongst this demographic and technology has allowed more open platforms for financial products than ever before,” the Nikko study says.
“… [Fintech] is symptomatic of a well functioning capitalist economy responding to inefficiencies and new demand drivers brought about by the upheaval in regulatory conditions and operating environments,”
However, Monson says while fintech has large disruptive potential, the financial industry incumbents would inevitably respond.
“Banks have always found ways to adapt and ‘on-board’ new technology, be it telephone banking, credit cards, capital markets and now internet and smartphone banking and we don’t see why this shouldn’t be the case with fintech, as well,” he says in the report.
The paper says regional differences in fintech applications would also likely emerge with the West targeting “cost efficiencies and providing investment returns” as Asia focuses on acquiring customers and “financial inclusion”.
Banks would likely benefit from fintech in regions where they enjoy strong regulatory support coupled with ‘flexible’ employment laws and “high potential digital penetration”, according to the Nikko analysis, while disruption may occur in jurisdictions without these features.
“We are more sceptical of fintech business models that are built on pure regulatory arbitrage (capital or KYC [know your client] requirements) as these have a lower probability of succeeding over the long term,” the paper says. “An overwhelming amount of fintech business models target riskier unsecured consumer and small business lending, which is an area banks do not always service effectively or are restricted from servicing – we believe there is merit in this as a long term business proposition but see greater likelihood of co-operation between fintechs and banks in order for these to succeed.”
The report also tips:
- Huge cost savings accruing to banks over the next five to 10 years due to ‘blockchain’ and other technological innovations, with large multi-national bank centres such as Singapore especially benefitting;
- Banks will be assessed more rigorously on how they integrate technology into their targeted business area; and,
- Those institutions assessed as “digital banking leaders” would trade at a premium.